Mexico monetary policy on hold, inflation should be close to 3% in 2016

Banxico decided to maintain the reference rate at 3.00% as expected. The press release highlights that the balance of risks to growth has worsen since the previous meeting while the inflation outlook remains the same, suggesting a dovish stance. It is believed that the bias is to maintain the rate as long as possible until it is clear that inflation is at risk.

Global growth is still facing downside risks under lower volatility. The board acknowledges that the balance of risks of the global economy has deteriorated while there has been lower volatility in the financial markets. Moreover, local rates have decreased and the MXN has appreciated.

Mexico's growth remains moderate. Exports have lost dynamism but consumption is stronger due to higher employment, remittances, banking finance, and low inflation. However, the slack condition remains and demand side pressures are not expected. Inflation should remain close to 3% in 2016. According to the board, inflation will pick up in the beginning of next year due to base effects and some FX pass-through, but this will not be a generalized worsening of the inflation dynamics. There are risks (higher FX depreciation and or lower economic activity), but the balance of them remains unchanged.

The policy bias is still to maintain the rate at 3.00% as long as inflation risk is not an issue. Given that the domestic conditions are still positive for inflation dynamics and that the relevant risk to the inflation path is financial volatility; and the fact that there has been relative stability in the local rates in the past periods of stress and that, ultimately, the FX pass-through has been gradual and moderate, allow to believe that Banxico will not immediately hike after the US Fed. Not until the board observes how these variable play out in the context of timid local growth and low inflation, and while there is still the expectation of additional positive shocks to inflation (gasoline prices). 

"We confirm our call for a June 2016 hike, when it should be clear as to how inflation dynamics will likely play out into 2017", notes Barclays.